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Dr Pepper's Margins Strong; Volumes Down

Zacks Equity Research

On Mar 25, 2014, we issued an updated research report on Dr Pepper Snapple Group Inc. (DPS).

On Feb 12, the beverage company reported mixed fourth-quarter fiscal 2013 results, beating the Zacks Consensus Estimate for earnings but missing the same for revenues.

Adjusted earnings of 97 cents per share beat the Zacks Consensus Estimate by 14.1% despite significantly weaker volumes. Moreover, earnings increased 18.3% year over year due to pricing/productivity gains, lower taxes and a LIFO inventory benefit.  However, sales continued to be soft, missing the Zacks Consensus Estimate by 1.4% and declining 1% year over year due to weak carbonated soft drinks (CSD) volumes and slow consumer spending environment.

Though the company is consistently delivering strong bottom-line results, it needs to turn around sales. Weak volume trends, ongoing pressure in the U.S. CSD category, and lack of exposure outside the U.S keep us concerned.

Changing consumer preferences, increasing health consciousness and obesity concerns, possible new taxes in sugar-sweetened beverages and growing regulatory pressures have put tremendous pressure on the CSD category in North America. These headwinds are significantly affecting Dr Pepper’s CSD volumes which comprise around 80–85% of its business.

Dr Pepper is trying to reinvigorate its CSD category through low-calorie versions of its popular brands like Dr Pepper, 7UP, Sunkist Orange Soda, A&W Root Beer, Canada Dry Ginger Ale and RC Cola. The 10 calorie drinks have gained decent success, bringing new as well as lapsed consumers back to the category.

The company also enjoys solid fundamentals - strong position in the flavored CSD market, efficient cost management and regularly returning cash to shareholders. Moreover, its priority brand agreements with beverage giants, The Coca Cola Company (KO) and PepsiCo, Inc. (PEP) ensure that the popular brands of Dr Pepper are included in all core packages, major merchandising events and display activities that companies participate in, thus boosting the sales of Dr Pepper’s brands.

Other Stocks to Consider

Dr Pepper carries a Zacks Rank #2 (Buy). Another beverage stock worth considering is Monster Beverage Corporation (MNST) carrying the same rank as Dr Pepper.

Read the Full Research Report on KO
Read the Full Research Report on DPS
Read the Full Research Report on PEP
Read the Full Research Report on MNST

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